Client Newsflash

SEC Announces Significant Enforcement Initiatives

August 6, 2009

In a speech at the New York City Bar yesterday evening, Robert Khuzami, Director of Enforcement of the Securities and Exchange Commission, announced a number of significant changes to Enforcement Division practice.  Mr. Khuzami explained that the changes – prompted by the Enforcement Division’s self-assessment conducted during Mr. Khuzami’s first 100 days as Director – seek to streamline the SEC’s procedures and to accelerate the process of identifying, pursuing, and resolving cases.


Corporate issuers and regulated entities can expect to feel the impact of the announced initiatives in further heightened enforcement activity, particularly in the areas discussed below, and in faster moving investigations.  These developments only enhance the importance of promptly and proactively engaging with the Enforcement Division staff upon receipt of requests and subpoenas.


The announced initiatives fell into the following categories:


New Specialized Units

Mr. Khuzami said that the Enforcement Division will form specialized units of staff personnel.  Each unit will be led by a Unit Chief and staffed by people in different offices throughout the country who either have or will develop specific expertise in a relevant subject matter area.  The five units described in yesterday’s speech are:

Asset Management, focusing on investment advisers, investment companies, hedge funds, and private equity funds.  Mr. Khuzami explained that the unit will work together with the Office of Compliance and Investigations and focus on a range of areas including disclosure, valuation, portfolio performance, transactions with affiliates, due diligence and diversification, misappropriation, and conflicts of interest.


Market Abuse, focusing on institutional traders, market professionals and others.  Mr. Khuzami indicated that the unit will build analytical tools to look across markets, corporate announcements, and types of securities to identify and target suspicious trading.


Structured and New Products, focusing on complex derivatives, including credit default swaps, collateralized debt obligations, and new financial products as they develop.


Foreign Corrupt Practices Act, working with other law enforcement agencies in the U.S. and abroad to identify and pursue potential violations of the Foreign Corrupt Practices Act.


Municipal Securities and Public Pensions, focusing on potential abuses in municipal securities, including offering and disclosure issues, tax and arbitrage activity, unfunded or underfunded liabilities, and “pay to play” schemes.


Streamlining Existing Management Structure and Policies and Procedures

Mr. Khuzami announced several changes to existing management structure and policies, which he described as designed to eliminate layers of bureaucracy and make the Division more nimble.  These changes include:

Flattening Management Structure: Mr. Khuzami announced that the Division would be “redeploying” its Branch Chiefs to eliminate an additional layer of management and to permit current Branch Chiefs to focus full-time on investigations.


Delegating More Authority to Local Senior Officers: Mr. Khuzami announced a series of changes to delegate greater authority to senior officers in local offices, including subpoena power, the power to enter into “routine settlements,” the power to make Wells calls, and the power to open investigations.


Tolling Agreements: Mr. Khuzami indicated that, going forward, only the Director would have authority to approve tolling agreements.  As Director, Mr. Khuzami said that he would approve such agreements as an exception and not the rule.


Creation of an Office of Market Intelligence

Mr. Khuzami announced the creation of an office that will be dedicated to collecting, processing, monitoring, and responding to the numerous tips the Division receives.


Enhancing Individual Incentives to Cooperate

A former prosecutor, Mr. Khuzami announced changes that seem to borrow a page from the Department of Justice’s approach to cooperation in an effort to encourage individuals to report wrongdoing  and cooperate with the staff in its investigations.  Included in the initiatives are:

  • a proposed public policy statement on standards to evaluate cooperation for individuals, analogous to the SEC’s 2001 Seaboard guidance for corporate issuers;
  • expediting and streamlining the process of submitting immunity requests and providing individuals with oral assurances early in an investigation that the SEC does not intend to pursue charges against an individual cooperator; and
  • possible use of “deferred prosecution agreements” in which the SEC would agree to forego enforcement actions against individuals or entities in exchange for cooperation, waivers of statutes of limitations, and other specific undertakings.

Mr. Khuzami emphasized that the SEC would reward only extraordinary cooperation, not merely compliance with routine or expected requests.


In response to a question about when the changes would go into effect, Mr. Khuzami initially responded: “tonight.”  Although he later acknowledged that it would take some time to implement the initiatives he described, Mr. Khuzami did say that the Division would begin to do so very quickly.


In his speech, Mr. Khuzami also discussed many of the SEC’s ongoing enforcement priorities.  He explained that the Subprime Working Group, formed in 2007, would remain intact and continue its efforts to bring appropriate enforcement actions related to the financial crisis.  Likewise, the Division will continue its emphasis on bringing enforcement actions related to Ponzi schemes and insider trading, including cross-market misconduct.  Mr. Khuzami also mentioned other priorities for the Division, many of which are familiar from recent cases and news accounts.  Those priorities include pursuing placement agents and others for seeking kickbacks related to public pension investments; pursuing hedge fund consultants for breaches of fiduciary duties in recommending inappropriate hedge funds investments; bringing Sarbanes Oxley section 304 clawback actions; investigating proxy disclosure violations; bringing accounting and financial statement fraud actions; and pursuing naked short sale rule violations.


The initiatives described above represent a substantial further step by the Enforcement Division in the direction of faster and more decentralized enforcement.  Issuers and regulated entities can expect faster moving investigations marked by fewer pauses for internal, administrative review.  As but one example, Mr. Khuzami said that recipients of voluntary requests for information who do not cooperate completely and promptly can expect subpoenas literally “the next morning.”  All of these changes only emphasize the importance of responding to and engaging the SEC promptly and proactively when in receipt of requests and subpoenas.



If you have questions regarding this newsflash, please call any of the lawyers listed below or your regular Davis Polk contact.

Carey R. Dunne 212 450 4158
William J. Fenrich212 450
Edmund Polubinski III212 450
James H.R. Windels212 450
Raul F. Yanes* 202 962
*Admission pending in DC; practicing in DC under the supervision of partners in the firm.
     Davis Polk & Wardwell LLP
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